Month: May 2005

From the ABA TechShow 2005: “60 Sites in 60 Minutes.” Congrats to the LawProf Blogs Network (started by Professor Paul L. Caron who writes the TaxProf Blog) for making the list.

This is a great article authored by Beckett G. Cantley, Assistant Professor of Law at St. Thomas University School of Law, discussing the birth and then demise of the SESOP: “Congress Giveth and Congress Taketh Away: The slow death of the SESOP.”

(Source: TaxProf Blog)

A federal district judge in Nebraska yesterday struck down an amendment to Nebraska’s State Constitution which provides that “[o]nly marriage between a man and a woman shall be valid or recognized in Nebraska.” The law was passed overwhelmingly by the voters in November of 2000. This New York Times article here states that the “Nebraska ruling is the first in which a federal court has struck down a state ban on same-[gender] marriage” and noted that congressional leaders are pointing to the decision “as evidence of the need for a federal constitutional amendment banning same-[gender] marriage.”

You can access the opinion written by Judge Joseph F. Bataillon here. Apparently, one of the key factors in the decision was the overly broad manner in which the amendment was written. The amendment stated that “[t]he uniting of two persons of the same gender in a civil union, domestic partnership, or other similar same-[gender] relationship shall not be valid or recognized in Nebraska.” Judge Bataillon inferred that such language would in effect “void numerous existing contracts, labor agreements and corporate policies that extend to same-[gender] partners any benefits once offered only to spouses.” While he emphasized the legitimate goals of promoting stable family relationships and protecting children” he noted that the amendment was a “blanket prospective prohibition on any type of legal recognition of a same-[gender]relationship” and that the provision could be interpreted to prohibit companies and governments from providing benefits to domestic partners under various benefit plans.

Please note foonote 21 of the opinion which gives a brief history of benefits being offered to same-gender couples.

Another article from CitizenLink: “Judge Strikes Down Nebraska DOMA.”

Read more about the impact of marriage laws on benefits here.

Senators Rick Santorum (R-PA) and Jim DeMint (R-SC) have introduced legislation “to enhance and encourage affordable healthcare coverage for uninsured and low-income individuals, as well as small business employers and their employees.” The legislation would create “a tax credit for small businesses who contribute money to an employee’s HSA, and an above the line deduction for high-deductible health plans.” Read about it in this press release.

In this article here discussing the legislation, Vicki Agler of the National Federation of Independent Business predicts that health savings accounts are “virtually going to be the wave of the future for small businesses.”

Interesting article from the Associated Press via BusinessWeek Online: “Airlines Face Pressure Over Pension Relief.” Excerpt:

William J. Rochelle, a bankruptcy lawyer with Fulbright and Jaworski in New York, said Congress needs to devise some way for airlines and other businesses, such as automakers and truckers, to lighten their pension burden outside of bankruptcy court, where workers’ retirement benefits are quite likely to be gutted at the hands of banks and other creditors.

The current system isn’t fair to retirees, Rochelle said, in that they lose their pensions and any money they had invested in the company’s stock, which typically becomes worthless during the bankruptcy reorganization. Investors, on the other hand, are able to snap up debt at pennies on the dolllar and then can profit if the company recovers and their debt is converted into equity in the new company.

“Right now our system is creating a transfer of wealth from retirees to junk bond investors,” he said.

Alan Lebowitz, Deputy Assistant Secretary for Program Operations, EBSA, has written a letter (which you can access here) to the AFL-CIO setting forth the DOL’s views regarding the ERISA violations that could occur if plan fiduciaries are involved in expending “plan assets to inform participants about the current public debate on Social Security” as well as the “hiring and firing of [plan] service providers based upon their opinions on Social Security reform.”

Regarding the issue of using plan assets to express views or provide information on Social Security policy, the DOL stated that “such expenditures are neither for the payment of benefits nor for plan administration, and accordingly fall outside the limited scope of expenditures permitted by ERISA.” The DOL rejected the assertion that such expenditures were permissible since “current Social Security proposals could have a significant impact on the national economy, financial markets, and plan investments.” The DOL stated, however, that in some very narrow circumstances, such as where a legislative proposal is near enactment and closely tied to plan issues, a “fiduciary could decide to spend plan assets to educate participants about the need to take the legislation into account in making particular decisions about their options under the plan.”

Regarding the issue of considering a service providers’ views on Social Security as a factor in selection and retention decisions, the DOL reiterated ERISA standards imposed on plan fiduciaries of acting with an “eye single to the interests of the participants and beneficiaries” and stated that “it would be unlawful for a plan fiduciary to review the plan’s service providers based, not upon the quality and expense of their services, but rather upon their views on Social Security or any other broad area of public policy.” The DOL went on to state:

Although your counsel’s opinion points out that a fiduciary may consider such collateral factors only when choosing a service provider that is better than or equal to alternative providers . . the Department is concerned that fiduciaries may nevertheless view the AFL-CIO’s recent attention to the question as an invitation to judge service providers first for their positions on Social Security and only second for their ability to meet plans’ particular needs.

DOL’s bottom line: “A fiduciary may never increase a plan’s expenses, sacrifice the security of promised benefits, or reduce the return on plan assets, in order to promote its views on Social Security or any other broad policy issue.”

The Wall Street Journal has an article commenting on the letter entitled “Pension Fund Politics.”

Also, you can access a New York Times article here.

Fiduciary Counselors, Inc, has posted on their website a number of very useful articles written or co-authored by Nell Hennessy and others. Here are a couple of the articles listed:

• Understanding DOL’s New Class Exemption for the Release of Claims and Extensions of Credit in Connection With Litigation[pdf]
• Defined Benefit Plans in Corporate Transactions[pdf]

What is the IRS telling its agents to look for in the executive compensation arena when they audit an employer? The IRS has recently posted on their website “audit technique guides (ATGs) that agents use during the course of corporation and/or executive employee tax examinations” which cover these topics:

• Transfers of Compensatory Stock Options to Related Persons
• Non-Qualified Deferred Compensation Plans
• Stock Based Compensation
• IRC 162(m) Salary Deduction Limitation
• Fringe Benefits
• Golden Parachutes
• Split Dollar Life Insurance

The ATGs contain some very useful information for practitioners, including statements about where the agents wil be looking for information and whom they will interview in search of information in an audit. For instance, agents will be asking to interview “company personnel that are most knowledgeable on executive compensation practices, such as the director of human resources or a plan administrator,” determining “whether the company paid a benefits consulting firm for the executive’s wealth management” and reviewing copies of the “contract between the consulting firm and the corporation.” According to the guides, agents will also be reviewing Board of Directions and Compensation Committee minutes, 10-K and 14-A Proxy Statements, websites for the employer, as well reading Fortune magazine articles and “googling” the internet for “information on the corporation for the years under audit.” (Does that mean that agents will be searching blogs such as Foonoted.org, seeking to uncover information that would be useful in an audit?)

The ATGs could also be helpful for companies that wish to perform a self-audit of their executive compensation practices, by providing a road map of the issues that IRS will be looking at and pointing out areas of concern that can occur such as as this one under the “Non-Qualified Deferred Compensation Plans” section:

A NQDC plan that references the employer’s § 401(k) plan may contain a provision that could cause disqualification of the § 401(k) plan. Section 401(k)(4)(A) and § 1.401(k)-1(e)(6) provide that a § 401(k) plan may not condition any other benefit (including participation in a NQDC) upon the employee’s participation or nonparticipation in the § 401(k) plan. Watch for things like a NQDC plan provision that limits the total amount that can be deferred between the NQDC plan and the § 401(k) plan or a NQDC provision that states that participation is limited to employees who elect not to participate in the § 401(k) plan. Contact Employee Plans in the TEGE Operating Division or Counsel TEGE if provisions such as these are encountered.

Also, the “Non-Qualified Deferred Compensation” section of the guides goes on to mention briefly new Internal Revenue Code § 409A (which provides comprehensive rules governing nonqualified deferred compensation arrangements) but states that the “audit guide will be updated to elaborate on § 409A once comprehensive regulations have been issued.”

Haynes and Boone discusses the ATGs here in a Compensation Alert.